Retail Leader - May/June 2018 - 22

> COVER STORY
FRAGMENTED MARKET = GROWTH
OPPORTUNITY
Ulta Beauty plays in the specialty beauty segment
and currently has a 4% share of market valued
at $138 billion.
INTERNET

HAIR SALONS

HOMESHOPPING

GROCERY

DIRECT RETAILING
WAREHOUSE CLUBS
VARIETY STORES

SPECIALTY BEAUTY

BEAUTY AND
PERSONAL CARE
SPEND BY
CHANNEL

SPECIALTY APPAREL
& OTHER
DEPARTMENT
STORES

DRUGSTORES

MASS
MERCHANDISERS

SOURCE: Euromonitor Intenational. "Beauty and Personal Care in the
US." April 2017

to a new level. Ulta routinely adds new brands - including its own
- at the low end and the high end to deepen its appeal to core customers referred to as beauty enthusiasts. With such a wide-ranging
product offering the company is never overexposed to weakness in
any particular area or hot trend.
Dillon has pushed Ulta aggressively into digital as well and like
many retailers reports that omnichannel customers are its most
valuable, spending the most and staying sticky to the brand. Last
year was Ulta's best ever digital performance with sales up 65 percent
to $569 million accounting for roughly 10 percent of total company sales. Those sales are largely incremental too, according to the
company.
The biggest advantage in Ulta's arsenal is a loyalty program called
Ultamate Rewards. The year prior to Dillon's arrival the program
had 10 million members, but has since exploded to more than 30
million this year. Ulta makes signing up easy since anyone who
makes a purchase can join without having to open a credit account,
although that option is available. Late last year, a new "diamond" tier
was added to recognize customers who spend more than $1,200 annually - which isn't hard to do in the beauty category - who then
earn rewards at a higher rate similar to how most airline and hotel
programs reward their most loyal customers.
"We have a great loyalty program that provides tremendous opportunity. The customer expects you to use the data they provide to
develop very personalized interactions and experiences with them.
The customer is happy giving the data if they get value in return,"
said Eric Messerschmidt, Ulta's Senior Vice President Strategic Marketing, CRM and Loyalty who also spoke at Shoptalk. "If you want
to have a relationship, you better recognize the guest's birthday, her
anniversary with the program and when a new product comes out
that you think she might be interested in you want to tell her about
it and also put the right samples in her bag to surprise and delight."
22

Retail Leader.com MAY/JUNE 2018

THE NEXT FIVE YEARS
It is conceivable that Ulta could double its store base over time,
although the company has provided no such direction. Ulta
declined Retail Leader's request to speak with Dillon or respond
to written questions, but more details on the company's long
term vision will come this fall when Ulta hosts an annual investor
conference. The company's current projections, shared with investors in 2016, envision a range of between 1,400 and 1,700 stores.
However, Ulta ended last year with nearly 1,100 locations and with
plans to add another 100 stores this year it will soon hit the low
end of it store expansion range.
Although Ulta expects greater growth in e-commerce, that
doesn't negate the need for more stores. One look at its store location map reveals opportunities to increase penetration in existing
markets and enter new ones. Stores are vital to Ulta's future due to
the offering of salon services that generate invaluable traffic and
provide an experience that can't be replicated online.
There are also abundant real estate opportunities for the typical
10,000 square foot Ulta Store and the retailer's solid financial footing makes it a desirable tenant for shopping centers. A new store
requires a net investment of about $1.6 million and within five
years annuals sales of the typical store are approaching $5 million.
Of course, competitors are sitting still and Ulta isn't sneaking
up on anyone these days, with some of the easy market share gains
already had. For example, Ulta's ascent has corresponded to weakness in the department store channel and Macy's in particular.
Macy's spent the past five years rightsizing its department store
fleet, which now numbers about 650 locations compared to nearly
800 five years ago. During that time, its sales declined to $24.8
billion from $27.9 billion. Roughly $3 billion in revenue went to
competitors, including Ulta Beauty, since Macy's generates 38 percent of its sales from the broad categories of women's accessories,
intimate apparel, shoes and cosmetics.
However, Macy's remains a formidable player that understands
beauty is an enduring category, which is why in the midst of deteriorating fundamentals at its core business it acquired the upstart
Bluemercury beauty chain in 2015. Macy's has since expanded the
concept's freestanding locations, adding 37 new locations last year
to end with 137 total.
Ulta's future share gains from mass merchants could also be
under pressure. Food, drug and mass retailers account for roughly
half of the $82 billion beauty products market where Ulta figures
its share is about 6 percent. Retailers such as Walmart, Target,
Walgreens and CVS Health operate a combined 25,000 stores
that may not offer Ulta's breadth of assortment but are certainly
more convenient and routinely being refreshed with fixtures and
lighting to improve the experience and assortments optimized to
reflect the latest trends.
Ulta also faces a challenge on the high end from Sephora, the
beauty retailer supported by the resources and prestige of its $50.9
billion parent company and leading global luxury goods purveyor
LVMH Mo√ęt Hennessy Louis Vuitton. Sephora currently operates
370 U.S. stores and 590 locations inside J.C. Penney stores. Specifics about Sephora's growth plans are hard to come by, but the
brand falls into the second largest of LVMH's five divisions known
as "selective retailing," which generated 39 percent of its 2017
revenues of $15.9 billion from the U.S.


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Table of Contents for the Digital Edition of Retail Leader - May/June 2018

Contents
Retail Leader - May/June 2018 - Cover1
Retail Leader - May/June 2018 - Cover2
Retail Leader - May/June 2018 - 3
Retail Leader - May/June 2018 - Contents
Retail Leader - May/June 2018 - 5
Retail Leader - May/June 2018 - 6
Retail Leader - May/June 2018 - 7
Retail Leader - May/June 2018 - 8
Retail Leader - May/June 2018 - 9
Retail Leader - May/June 2018 - 10
Retail Leader - May/June 2018 - 11
Retail Leader - May/June 2018 - 12
Retail Leader - May/June 2018 - 13
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Retail Leader - May/June 2018 - 16
Retail Leader - May/June 2018 - 17
Retail Leader - May/June 2018 - 18
Retail Leader - May/June 2018 - S1
Retail Leader - May/June 2018 - S2
Retail Leader - May/June 2018 - S3
Retail Leader - May/June 2018 - S4
Retail Leader - May/June 2018 - S5
Retail Leader - May/June 2018 - S6
Retail Leader - May/June 2018 - S7
Retail Leader - May/June 2018 - S8
Retail Leader - May/June 2018 - 19
Retail Leader - May/June 2018 - 20
Retail Leader - May/June 2018 - 21
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Retail Leader - May/June 2018 - Cover3
Retail Leader - May/June 2018 - Cover4
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